There is a new foreclosure loophole that investors have
found in the Florida marketplace. Many
investors have found a way to purchase the titles to hurting condos and other
community properties from homeowners associations, and then rent the units out,
while making enormous profits.
These investors purchase
the titles to properties by settling
on the debt owed to an association via an HOA foreclosure auction, which generally
settles for a sum much less than what is owed on the mortgage. In turn, they have secured the right of possession
until the bank and the court system have a chance to catch up and go through
the actual foreclosure. Once they secure
possession, they rent out the unit to generate a return on their investment.
The issue at hand is that tenants of these properties are
renting these units without disclosure of this information which puts them in a
vulnerable position once the bank follows through.
On one hand, the HOA recovers the funds that are due,
which are needed for day to day operation of the association, the unit is
occupied and less likely to be vandalized or stripped, and the investor makes a
profit for settling the debts.
The flip side is that tenants get evicted and told that
they have to move due to the bank repossessing the property, which can leave
tenants in emotional situation. Given
that the unit was going to get foreclosed on anyway, does it really matter if
someone purchases the right of possession for a finite period of time?
For the benefit of the tenant, if there is a lease in
place, according the Foreclosure Act of 2009, the bank must honor the terms of
the lease, unless the property is sold to someone with the intent to occupy the
property, at which point the tenant has 90 days to find another place to live.
Donna DiMaggio Berger, community association law expert said, “That being said,
it is prudent for the landlord to make that disclosure and prudent for a tenant
to ask if any such situation exists prior to signing the lease.”
McCabe, chief executive of McCabe Research & Consulting in Deerfield Beach
also commented, “We’ve seen some very creative ways for people to make money in
this downturn. Some ways have been
illegal, some have been shady, and some have operated in a gray area, but
they’ve all been creative.”
example, a property originally bought in 2005 for $454,000, was sold through a
HOA auction for $14,900 and apparently the bank did not pay off the HOA
delinquency and appears to have lost its right to repossess the property. The final result is then bartered between the
new title holder and the bank.
As crazy as this may sound, many attorneys that
specialize in real estate law say that this is a savvy business model and
completely legal. Some investors use
this as a strategy to delay the foreclosure auction then make an offer to the
bank before it goes back to auction for a slightly higher price than it would
sell at the auction.
The result is a small investment upfront for the investor
which can likely be recovered quickly and rented out. Purchasing the property for a substantial
discount before anyone else has a chance to up the opening bid, the owner gets
a free and clear property at the end which they can continue to simply rent out
and collect passive income, or turn around and sell it for additional
profit. Either way, there’s blood in the
water, and the investments sharks in Florida are swarming towards it for a
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